Cost of collection – Daily Trust

A recent Daily Trust story highlighted issues regarding the controversial Federal Government financial policy called cost of collection. The report said two agencies, namely Nigeria Customs Service (NCS) and Federal Inland Revenue Service (FIRS) alone earned 1.2 trillion naira in five years as cost of collection for revenues collected on behalf of the Federation.  FIRS collected over N900 billion from 2011 to 2015 as its statutory four percent cost of revenue collection while NCS collected over N300 billion which is seven percent of the revenue it collected within the same period.  During the years in question FIRS generated N22 trillion while NCS generated N4 trillion.

The report quoted FIRS’ head of communications Wahab Gbadamosi as saying, “Receipts are used to fund FIRS recurrent and capital expenditure as might be approved by the National Assembly.  FIRS receives four percent cost of collection only on non-oil receipts.” Customs on the other hand said its cost of collection is the only revenue source for running the service.  Its spokesman Wale Adeniyi said just before he was redeployed that NCS uses the money for “staff salaries, emoluments, recurrent and capital expenditure.” What happens if the cost of collection is more than the agencies’ needs for their recurrent and capital expenditure?  Gbadamosi said, “FIRS remits unspent components of its budget – not surplus please – to the CRF on dates stipulated by the Federal Government financial regulations.”

Cost of collection is a rather unusual financial arrangement for government’s key revenue generating agencies. It started as a welfare incentive to the agencies’ staff in order to motivate performance but it ended up as funding for their operational budgets. Section 15 (a) of FIRS (Establishment) Act says the major source for its funding is “a percentage as determined by the National Assembly of all non-oil and gas revenue collected by the Service which may be appropriated by the National Assembly for the capital and recurrent expenditure of the Service.” Under the old arrangement, FIRS got funds from the Federal budget to run its operations and then got a smaller percentage of funds it collected in a year as special welfare package for its staff. Under the current system however, its entire operations are funded from cost of collection.

While the system has an appearance of order and structure, it also has some inbuilt weaknesses. For one it weakens the intent of motivation. Rather than go directly to the staff to motivate them for their efforts, the agencies spend a lot of the money on building massive offices, residential complexes, vehicles etc. Nor is it proper to be given a fixed sum of collected revenue unless it exceeds a certain target. Under the current arrangement, the two agencies are certain to get huge sums as cost of collection even when they fail to meet revenue targets.

Studies by experts have uncovered insights that indicate reward and punishment incentives don’t usually work with routine tasks as tax collection.  It would work better if the agencies are given targets to meet or surpass before they are rewarded for their efforts, since they already draw good salaries for the routine tasks. Since the law empowers the National Assembly to approve the percentage to be earned as cost of collection, it should factor in the extant knowledge about staff motivation in such review and the budget approval process.  In the case of Customs Service, if the cost of collection is its only source of funding, that doesn’t make much sense since there is no certainty on the amount to be collected even though some of its expenditure such as staff salaries are fixed.

We urge the authorities to re-examine this system. It is better that the revenue generating agencies prepare a budget like everyone else and it is funded from the treasury, and then they receive a small percentage of the revenue they collected that goes directly to their staff as reward and motivation.


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